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How to Apply for an SBA Loan

SBA loan documents, calculator and pen on desk
May 13 2022 • by Marissa Scott • Business, Loans

If you are considering starting a small business, you are likely thinking about where your initial financing will come from. If you are already running a small business, you may be looking for additional funds to help grow it. While many entrepreneurs hear about options like venture capital and angel investors, they are seldom a realistic financing option for small businesses.

Most small business owners or people looking to start a small business are familiar with the Small Business Administration and the resources they offer. One of these resources includes financing. The SBA, which is a government agency, offers loans through partner banks and lenders across the country. The SBA guarantees, or backs, these loans so they’re less risky for the issuing lender. Because of this government backing, SBA loans are generally easier to qualify for than a traditional business loan.

Because the SBA does not lend money directly to small businesses, you must obtain your loan from an approved SBA lending partner. You can check to see if your local bank is an SBA lender, or you could use the Small Business Administration’s website to search for one. Although the SBA governs some aspects of the loans, such as fees, maximum interest rate, and overall eligibility requirements, the banks and lenders that issue them may have their own qualification criteria and interest rates.

Loans Offered by the SBA

There are three main types of loans available from the SBA. Which one is right for you will depend on what you will be financing, how much capital you need, and other varying requirements. Types of SBA loans include:

•    Microloans. The SBA’s microloan program provides loans up to $50,000. Microloans are typically not offered by traditional banks, but rather are issued by special intermediary lenders, designated by the SBA. These are usually non-profit community-based organizations.

•    504 Loan Program. The SBA’s 504 loan program provides growing small businesses with long-term financing, up to $5,000,000 to acquire, construct, or expand their business location or purchase machinery and equipment. Borrowers must first work with a Certified Development Company (CDC) who will coordinate the financing with a bank or credit union. The borrower puts down as little as a 10% contribution.

•    7(a) Loans. Businesses who need a larger loan can borrow up to $5 million through the SBA’s 7(a) loan program. Proceeds may be used to establish a new business or to assist in acquisition, operation, or expansion of an existing business. There is also an SBA Express Loan option with a faster approval process. The SBA guarantees up to 50% of these loans, and the maximum loan amount is $500,000. 

Although the exact eligibility requirements will depend on the type of SBA loan you’re applying for, and the lender you’re applying with, considerations will include where your business operates, its size, and your ability to repay the funding. 

Pursuing a Small Business Administration Loan

If you think an SBA loan makes sense for your small business, there are some things to consider before submitting your application:

•    Determine what your capital needs are. Whether you are developing a plan for a new business or actively operating an existing business, you’ll need to know your cash flow and profitability, as well as your funding needs.

•    Consider how much financing you can provide outside of the loan. Once you have determined a realistic number for your capital needs, determine what you can provide from your own personal assets and credit. You could also potentially see if friends or family are in a position to invest. If so, you should speak with a business attorney about raising capital through investors.

•    Evaluate your personal and business credit score. If you are already in business, your existing business credit score is just as important as your personal credit score. Both will help determine what kind of loans you are eligible for, how much you can borrow, and what loan terms you can expect. If you face challenges with your current credit scores, it is worth your time to determine how to improve them and present the best picture of creditworthiness you can.

•    Review requirements of the loan you would like to apply for. Eligibility requirements can vary by lender, and the SBA has its own requirements as well. Be sure to review all requirements to better understand which loans you may qualify for, and which lenders you can work with.

•    Gather required documents. If you do not already have one, create a business plan to submit to your chosen lender. Once you determine that you can meet that lender’s specific requirements, you should start the process of gathering any necessary legal and financial documents. This can seem overwhelming, so it’s a good idea to try and get a head start. Required documents may include:

  • Financial Statements
  • Bank statements (personal and business)
  • Corporate documents
  • Resumes of yourself and your management team
  • Your business plan
  • Listing of collateral

In addition to SBA loans being backed by the government, they typically also offer competitive rates and terms as well as lower down payments than traditional business loans. In some cases, collateral may not be required for an SBA loan. With 7(a) loans for example, lenders are not required to take collateral if the loan is less than $25,000. However, the lender may choose to make collateral mandatory, even if they’re not required to do so by the SBA.

Knowing what to expect when looking into an SBA loan will help ease the process when you consult with a lending officer to assess your situation. For more information and requirements for an SBA loan through BankFive visit our SBA Loans page.